Comments on: Bear Death Watch: Why It Failed

By: Anonymous

Anonymous — Sat, 15 Mar 2008 21:19:00 +0000

One theory on why hedge funds moving their balances impacted Bear’s own liquidity: at 11/30/07 Bear said clients were carrying free credit balances of roughly $36Bn (not sure if they’ve since updated that number, it was presumably much lower going into last week – but’s less assume it was just $15Bn). Anyway, Bear’s broker-dealer subsidiary has to segregate those free credit balances for clients, and they’re allowed to hold them in agency paper (as well as UST, perhaps other “low risk” paper). If hedge funds bombarded Bear with requests to withdraw their free credit balances, it’s one thing if the seg account contains cash; it’s something else if it contains agency paper, given the stressed prices this paper has been trading at. Bear may have been unable to dump the paper fast enough to generate cash to meet withdrawal requests, they might have had to inject additional cash into the broker-dealer to avoid default there and continue to meet net capital requirements. Of course all the other liquidity drains (repo counterparties saying “no mas”) would have just added fuel to the fire.

By: realty-based lawyer

realty-based lawyer — Sat, 15 Mar 2008 16:16:00 +0000

Bear wrote credit-default swaps in large volume. All/most of the swaps probably require Bear to post collateral in the event it’s downgraded below a specified level (a rating trigger), typically “A-.” Do you know whether S&P’s downgrade to “BBB” trips the rating trigger, or does it require two rating agencies, or is it set at “BBB”? If the last, the trigger wouldn’t be pulled unless/until Bear is downgraded below “BBB-”, at which point it very likely wouldn’t be able to meet the resulting collateral posting requirements (depending on the market value of its net exposures) and would simply go directly to somewhere in the “C” or “D” range. If the first, meaning the trigger’s already been pulled, the question is how S&P could give Bear a “BBB” rating – how much funding do they think the Fed will provide?

By: Anonymous

Anonymous — Sat, 15 Mar 2008 14:54:00 +0000

Question:

What about Lehman?

By: foesskewered

foesskewered — Sat, 15 Mar 2008 12:08:00 +0000

Actually, the problem doesn’t seem to be whether a rescue will materialise, but that careful consideration of how the rescue will work seems to point towards the fact that rescue efforts to date are delay tactics, aimed at minimising losses from the existing toxins and not a long term solution. The question is doesw anyone have a real long term solution rather than a magic act that ends up sweeping the mess under the carpet.

Yves, hastening the demise of Bear to gain more collateral for the TAF or TSL facility doesn’t seem to make sense considering the lengthy legal battle that’s sure to await all stakeholders in Bear.

By: Jojo

Jojo — Sat, 15 Mar 2008 09:05:00 +0000

Sounds like the FED better not pre-announce their future programs. The circling vultures won’t necessarily give the victim a chance to crawl to safety.

By: Steve

Steve — Sat, 15 Mar 2008 08:08:00 +0000

I doubt anyone wants to pick up Bear’s level 3 book and pending lawsuits. As for piecing out prime brokerage and wealth management, the first question is how big a hole has been blown into them by the run, and whether there’s a buyer who wants to `rebuild’ those businesses for a price that management can stomach. Bear is dead in the water. They can’t trade their positions and the client run isn’t going to stop. If there isn’t some (partial) resolution by Monday morning, I expect they’ll be filing by Monday afternoon. The Fed’s liquidity support means nothing if no one wants to do business with their brokers and desks.

By: Anonymous

Anonymous — Sat, 15 Mar 2008 06:03:00 +0000

>What upsets me is related to the following from the story, which is about the collateral which will be accepted by The fed soon:

The TSLF gave creditors every incentive to seize Carlyle Capital's collateral in order to present it at the Fed window in exchange for "lovely liquid Treasuries", something which Carlyle Capital itself couldn't do. Bear, on the other hand, is allowed to use the TSLF... but the TSLF doesn't go live until March 27.

> In other words, if Bear could have waited 10 (more) days, they could have dumped all this Toxic waste into The Fed pool? Do I have that right? Bear, along with everyone in this TAF (Term Auction Facility)/Term Security Lending Facility (TSLF) free-for-all are just waiting to buy time to unload junk to The Fed....is this right? In other words, Bear is going to fail because all it had left was junk securities, which The Fed was going to trade for taxpayer cash. Meanwhile, as bear now goes under, the selloff at Bears triggers more junk-related triggers that set other dominos falling, up until The Fed trades the junk for "real money".

Yves, can you help me on this?

By: Yves Smith

Yves Smith — Sat, 15 Mar 2008 05:58:00 +0000

Lune,

No, it's a good question, and one that flashed across my mind and then I dropped it, I'll go back and tweak the post.

Traders had apparently gotten nervous about Bear. The hedge funds withdrawing as prime brokerage clients was probably seen among traders as confirmation that the situation was perilous. This isn't well explained in the source (WSJ) and I foolishly didn't explain the likely transmission mechanism.

By: Lune

Lune — Sat, 15 Mar 2008 05:45:00 +0000

This is probably a stupid question, but I’m a little confused. Why would hedge funds moving their accounts away from Bear precipitate a bankruptcy? I’m assuming you mean that Bear was handling custodial and trading services for those hedge funds. Since they’re protected assets in separate accounts, a hedge fund moving them out would reduce future commissions/fees but doesn’t affect Bear’s cash reserves per se. Am I missing something? I would expect that only losses realized on Bear’s proprietary trades, or perhaps margin calls on Bear’s leveraged portfolio should lead to a loss of reserves, not the trading actions of its clients.